Chapter 14 - Cost of Capital
60. Mangrove Fruit Farms has a $200,000 bond issue outstanding that is selling at 92 percent of face value. The firm also has 1,500 shares of preferred stock and 15,000 shares of common stock outstanding. The preferred stock has a market price of $35 a share compared to a price of $24 a share for the common stock. What is the weight of the preferred stock as it relates to the firm's weighted average cost of capital? A. 6.75 percent B. 7.20 percent C. 7.75 percent D. 8.30 percent E. 8.80 percent
AACSB: Analytic Bloom's: Application Difficulty: Basic
Learning Objective: 14-3 Section: 14.4
Topic: Weight of preferred
14-31
Chapter 14 - Cost of Capital
61. Electronics Galore has 950,000 shares of common stock outstanding at a market price of $38 a share. The company also has 40,000 bonds outstanding that are quoted at 106 percent of face value. What weight should be given to the debt when the firm computes its weighted average cost of capital? A. 42 percent B. 46 percent C. 50 percent D. 54 percent E. 58 percent
AACSB: Analytic Bloom's: Application Difficulty: Basic
Learning Objective: 14-3 Section: 14.4
Topic: Weight of debt
14-32
Chapter 14 - Cost of Capital
62. Phillips Equipment has 80,000 bonds outstanding that are selling at par. Bonds with similar characteristics are yielding 6.75 percent. The company also has 750,000 shares of 7 percent preferred stock and 2.5 million shares of common stock outstanding. The preferred stock sells for $53 a share. The common stock has a beta of 1.34 and sells for $42 a share. The U.S.
Treasury bill is yielding 2.8 percent and the return on the market is 11.2 percent. The corporate tax rate is 38 percent. What is the firm's weighted average cost of capital? A. 10.39 percent B. 10.64 percent C. 11.18 percent D. 11.30 percent E. 11.56 percent
Re = 0.028 + 1.34 (0.112 - 0.028) = 0.14056 Rp = (0.07 ? $100)/$53 = 0.13208
WACC = ($105m/$224.75m) (0.14056) + ($39.75m/$224.75m) (0.13208) + ($80m/$224.75m) (0.0675) (1 - 0.38) = 10.39 percent
AACSB: Analytic Bloom's: Analysis Difficulty: Basic
Learning Objective: 14-3 Section: 14.4 Topic: WACC
14-33
Chapter 14 - Cost of Capital
63. Wayco Industrial Supply has a pre-tax cost of debt of 7.6 percent, a cost of equity of 14.3 percent, and a cost of preferred stock of 8.5 percent. The firm has 220,000 shares of common stock outstanding at a market price of $27 a share. There are 25,000 shares of preferred stock outstanding at a market price of $41 a share. The bond issue has a face value of $550,000 and a market quote of 101.2. The company's tax rate is 37 percent. What is the firm's weighted average cost of capital? A. 10.18 percent B. 10.84 percent C. 11.32 percent D. 12.60 percent E. 12.81 percent
WACC = ($5,940,000/$7,521,600) (0.143) + ($1,025,000/$7,521,600) (0.085) + ($556,600/$7,521,600) (0.076) (1 - 0.37) = 12.81 percent
AACSB: Analytic Bloom's: Analysis Difficulty: Basic
Learning Objective: 14-3 Section: 14.4 Topic: WACC
14-34
Chapter 14 - Cost of Capital
64. Central Systems, Inc. desires a weighted average cost of capital of 8 percent. The firm has an aftertax cost of debt of 4.8 percent and a cost of equity of 15.2 percent. What debt-equity ratio is needed for the firm to achieve its targeted weighted average cost of capital? A. 0.38 B. 0.44 C. 1.02 D. 2.25 E. 2.63
WACC = 0.08 = [We ? 0.152] + [(1 - We) ? 0.048)] We = 0.3077; Wd = 1 - We = 0.6923
Debt-equity ratio = 0.6923/0.3077 = 2.25
AACSB: Analytic Bloom's: Analysis Difficulty: Basic
Learning Objective: 14-3 Section: 14.4
Topic: Debt-equity ratio
14-35
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